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Indie.vc: Unicorns Are Out, Profits Are In

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Re: Indie.vc: Unicorns Are Out, Profits Are In

#61

Post by epicureanideal »

leesalminen wrote: post #32
manfredo wrote: post #15

In short: this author is endorsing a funding model focused on low initial investment and faster profitability. The benefits key benefits are that this funding model results in more women and minorities getting funding, as well as higher rate of companies surviving (10% vs. 44% [1]). The former is good, but probably isn't sufficient to motivate most investors. The latter doesn't necessarily translate into better retur…

I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward. As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our te…

Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"?

If not, if someone can establish a term it'll be easier to talk about this.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#62

Post by tonyarkles »

nostrademons wrote: post #56
foobar_ wrote: post #29

This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC. Do banks have something against software businesses ? Are there software companies that have bootstrapped themselves with loans (not friend/family loans) as opposed to VC ?

The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financi…

To add to this, a significant portion (I think) of opening a restaurant goes into purchasing physical assets: fridges, grills, safety equipment, tables/chairs, etc, and banks know how to liquidate those assets if your business fails. Taking a failed software company and selling off its assets is a much harder proposition.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#63

Post by spyckie2 »

manfredo wrote: post #15

In short: this author is endorsing a funding model focused on low initial investment and faster profitability. The benefits key benefits are that this funding model results in more women and minorities getting funding, as well as higher rate of companies surviving (10% vs. 44% [1]). The former is good, but probably isn't sufficient to motivate most investors. The latter doesn't necessarily translate into better retur…

I think it's a bit short sighted to say that the high risk high reward model is superior to this model. While that may be true in a theoretical sense, you have to take into account market conditions and competition.

As an analogy, you can have an investment thesis that vending machines with bottled sugary water have extremely high ROI... but you are missing the elephant in the room which is you'd have to compete against Coke and Pepsi's infrastructure and brand.

Similarly, if you are raising a fund and want to play the high risk, high reward game, you need to consider what the market conditions are.

First, it's definitely not an even playing field. Connections and brand mean a whole lot. The leading VCs have all the best deals coming to them and have a bunch of management consultants in the backroom trained to spot large market opportunities. The volume of deals and strong connections allows them to pick and choose the best opportunities, and everyone else is left with scraping the bottom of the barrel.

Second, there's only around 15-30 billion dollar companies created per year in the US, and there's probably 30-100x the amount of incubators or venture firms. It's just a limited market overall.

That's the game. In a theoretical sense, yes high risk, high reward opportunities have better ROI, but only if you are at the top of the game. So I'd hesitate to say that this is an objectively inferior model because for some investor's positions, this strategy would probably yield a much higher return.

Its probably better to compare the two models like Residential and Commercial asset types (a quick google search to show the comparisons: https://www.fortunebuilders.com/commercial-vs-residential-re...)

Re: Indie.vc: Unicorns Are Out, Profits Are In

#64

Post by teej »

epicureanideal wrote: post #61
leesalminen wrote: post #32

Earlier quoted context omitted.

I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward. As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our te…

Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"? If not, if someone can establish a term it'll be easier to talk about this.

There’s tons of existing finance infrastructure for this already, it just doesn’t reach tech. Small business loans, traditional banks, franchisors, local business investor groups, etc all facilitate these sorts of businesses today.

They just don’t do tech. This is because their risk models are built on 30+ years of priors and the financing is very often business sector specific. Tech is too much of an unknown for this model.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#65

Post by EGreg »

Oh really! I would like to see the day.

Our company, Qbix, is a poster child for the preaching of the Basecamp folks. We raised $107,000 from friends and family and then generated revenues, then another $135,000 and generated more revenues. We are up to almost $1MM in revenues now. Also we have attracted 8 million users and growing.

But many VCs have turned us down because they look for hockey stick growth and zero friction, and don’t like “the agency model” companies which make money. Actually, they’re just applying pattern-matching to reject the vast majority of startups unless they are hockey stick growing.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#66

Post by rapnie »

epicureanideal wrote: post #61
leesalminen wrote: post #32

Earlier quoted context omitted.

I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward. As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our te…

Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"? If not, if someone can establish a term it'll be easier to talk about this.

Zebras instead of Unicorns. Maybe you've heard of https://www.zebrasunite.com/

They have a manifesto on what a zebra is, that contains a nice image comparing with unicorn approach: https://medium.com/@sexandstartups/zebrasfix-c467e55f9d96

Re: Indie.vc: Unicorns Are Out, Profits Are In

#67

Post by [deleted] »

epicureanideal wrote: post #61
leesalminen wrote: post #32

Earlier quoted context omitted.

I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward. As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our te…

Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"? If not, if someone can establish a term it'll be easier to talk about this.

[deleted]

Re: Indie.vc: Unicorns Are Out, Profits Are In

#68

Post by loceng »

a13n wrote: post #47
Hongwei wrote: post #30

Earlier quoted context omitted.

A cause or symptom (I'm not sure about causality here) is that the Business Development Bank of Canada (BDC) directly funds most private Canadian VCs. VCs now have public money as part of their LP base, with some strings attached. Most of these strings (eg. don't waste taxpayer money doing anything unethical or overly negligent) will nudge VCs to be more conservative. Plus, the VCs are guaranteed 20%+ of their 2% car…

Purely anecdotal, but having lived in Canada for 5+ years now, I'd definitely say Canadians tend to be more averse to risk.

Arguably there are less Canadian VCs available locally as well, and therefore they can get away with offering worse conditions.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#69

Post by spyckie2 »

a13n wrote: post #37

As a founder of a bootstrapped & profitable company, I don't really get what's so attractive about this funding model. It seems like it's just a really, really, really expensive loan. They make it sound nice with their anti-VC, pro-founder marketing angle. But at the end of the day, they are charging you 3x what you're borrowing.

I think its pretty attractive if it reduces risk on the founder but gives the founder freedom to do whatever they want with the company at whatever time frame.

After experiencing it myself, I think that the push to grow big is a very big deterrent for me to take on VC money. The lifestyle is just not worth it.

Bootstrapping a company from the ground up works if you have the necessary skills and idea, but some ideas need access to capital, especially if they are operationally intensive. So I could see this model being pretty attractive in those situations.

Re: Indie.vc: Unicorns Are Out, Profits Are In

#70

Post by cjlars »

a13n wrote: post #37

As a founder of a bootstrapped & profitable company, I don't really get what's so attractive about this funding model. It seems like it's just a really, really, really expensive loan. They make it sound nice with their anti-VC, pro-founder marketing angle. But at the end of the day, they are charging you 3x what you're borrowing.

This is the model for pretty much every new venture that's 'main street' and not 'VC'. There are many times more main street businesses than tech startups. While it's reasonable to bootstrap a sole proprietorship tech services firm from nothing, restaurants need buildouts, HVAC companies need trucks, retail stores need inventory, etc. Equity is absolutely the most expensive form of financing, but the bank ain't touching your new restaurant concept so there's the equilibrium.
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